Natural Gas Rises, But GAZ Actually Falls

By Brendan Conway

Natural-gas futures are popping after Thursday’s inventory data showed that U.S. gas supplies are a little less glut-stricken than analysts expected.

Specifically, U.S. stockpiles rose by 28 billion cubic feet in the week ending April 27, U.S. Energy Information Administration weekly data showed. That’s below what Dow Jones Newswires’ Jerry A. DiColo reports is the annual average of 79-bcf gain for this time of year. It also undershot analysts’ expectations for a 31-bcf rise. Gas futures — which not too long ago were prompting fears of falling all the way to $1 — are up 3.6% to $2.44.

Bloomberg

Up and up.

Despite the pretty strong gains the last few weeks, there’s doubt here and there that the commodity can keep pushing higher. “This market will require an early start to a hot summer in order to push nearby values much above the $2.50 level,” Jim Ritterbusch, head of trading advisor Ritterbusch and Associates, tells DJN.

The United States Natural Gas Fund (UNG) is up 3.9% to $16.81 recently. But as usual, the action in the iPath Dow Jones UBS Natural Gas Subindex (GAZ) is, well, unusual. The normal creation-unit process was shut off years ago for this fund. That means it trades much like a closed-end fund.

In fact, GAZ is currently trading at a 77% premium to its indicative value, according to FactSet Research Systems. Unlike its sector peers, GAZ is down 2% on the session at $3.86.

As is known by any trader who watched the VelocityShares Daily 2X VIX Short-Term ETN (TVIX) surge and implode earlier this year because of creation-unit issues, a 77% premium is a serious danger to those who don’t understand how rapidly it can disappear. Since the lack of new supply is the only major factor driving the price, hard-to-detect shifts in arbitrage strategies or rumors about new creations are what really matter.

Unless you’re plugged into the exchange-traded underworld and its plumbing, stay away from GAZ.

About Focus on Funds

As exchange-traded funds and other investing vehicles have ballooned in number, the task of figuring out what works well and what doesn’t has only gotten harder. Barrons.com’s Focus on Funds looks under the hood of ETFs, mutual funds and hedge funds for overlooked values, actionable ideas and the latest pitfalls for fund investors.

Chris Dieterich has covered the U.S. stock market for The Wall Street Journal and Dow Jones Newswires. He is a graduate of Regis University and the Missouri School of Journalism.